Entertainment

Everything You Need to Know About Facebook's $100 Billion IPO

By now, you've probably seen the latest status update on Facebook's IPO, and it's a doosey: When the company goes public it will raise $10 billion, bringing its valuation to $100 billion

While the value of raising $10 billion is self-evident, Facebook has been a private company for seven years or so and seems to be humming along quite nicely. Why do Mark Zuckerberg and Co. want to open his books for investors and invite rude questions from analysts?

We tackled that question and more below, which is designed to be a primer for that most-anticipated of all social media IPOs.

Why is Facebook going public?

There are several reasons why a company typically goes public. In a recent paper by professors James Brau and Stanley Fawcett of Brigham Young University, the two outlined the usual motivations: To raise capital and to enrich the company's founders and insiders. However, Facebook's situation is a bit different. For Facebook, a better question might be "Why are they going public now as opposed to a couple of years ago?'"

One major reason is that private trading in the company is pretty much maxed out. Under U.S. laws, once you get 500 or more private shareholders, you have to publish detailed data about your company's financial performance. Private trading in Facebook as well as Zynga, Twitter and the pre-IPO LinkedIn also drew scrutiny from the SEC last December.

In addition to the feds, though, Facebook also has to content with a rivalry from Google+. As The Economist notes, "Facebook will want to seek a listing before rivals erode its lead in the social-networking sphere."

Finally, going public brings a set of headaches, which we'll illustrate in the next question.

What's the downside of going public?

There are a few, mostly the loss of privacy and scads of red tape. Facebook will now have to report quarterly and annual earnings as well as more juicy information, like the amount of shares that executives in the company hold.

Another issue is Sarbanes-Oxley, the post-Enron reform Act that President George W. Bush signed into law in 2002. SOX, as it's known, provides a new level of lawyer- and accountant-approved documentation for public firms and is to blame for the decline in U.S. IPOs over the last decade. However, proponents say SOX makes U.S. businesses more competitive because it forced American companies to clean up their books.

When will we know the exact value of Facebook's shares?

Most likely, not until the night before Facebook goes public. Until then, Facebook will have to file an S-1 form with the SEC and then can file various amended versions (S-1/As), none of which will have much in the way of compelling information. "It's boilerplate," says Brau of the S-1s and amended S-1s. "It will be missing a lot of info." Pricing information will be included in the final S-1/A, which will be made public just before Facebook shares are available.

Pricing will also depend on how Facebook brings its shares to the market. The typical course is to go with a firm commitment offering, which would offer shares at a set price to the underwriter. This can be a sweet deal for the underwriter if the shares are underpriced and is considered to be leaving money on the table for the about-to-go-public firm. Another option, made popular by Google's 2004 IPO, is to offer shares via an auction. It's not clear which route Facebook will take.

Will this be the biggest tech IPO ever?

Definitely. The next-largest tech IPO ever is one for Infineon, a German company that raised $5.9 billion in 2000. (Google's IPO, which raised $1.9 billion, is number six on the list.) Facebook's will hardly be the biggest IPO ever, though. That honor belongs to either General Motors, which raised $23.1 billion in 2010 or Nippon Telegraph, which raised $29.8 billion in 1987, in inflation-adjusted dollars.

How does Facebook compare to the world's biggest IPOs?

Note: The proceeds are recorded in actual dollars at the time of public offering, and are not adjusted for inflation.

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